business

Airbnb: Why Nobody Wanted to Invest

The first time you heard about Airbnb – an app that let you stay in a stranger’s house – it likely seemed odd. If you felt this way you weren’t alone. When roommates Brian Chesky, Joe Gebbia, and Nathan Blecharczyk first launched their idea for a company that let strangers sleep in their house on air mattresses in 2008, understandably, they found few investors. Cut to ten years later and that same company now has a reported valuation of $31 billion.

Trying to ‘Make a Few Bucks’

In October of 2007, roommates Brian Chesky and Joe Gebbia were flat broke living in San Francisco. But as luck would have it, a large design conference was coming to town. Gebbia knew all the hotels in the area were likely going to be booked, so he reasoned that if they put a couple of air mattress on the floor of their apartment and rented them out, they might have a way to, ‘make a few bucks’. To spice up the deal, the roommates also decided they would offer breakfast to their guests. They bought three air mattresses, and started a simple website called www.airbedandbreakfast.com. Much to the roommates’ surprise, they found three takers.

Not a Single Investor

Shortly thereafter, the team realized this might have potential for becoming something larger. It was at this point the team brought in Nathan Blecharczyk to code the site and serve as an additional co-founder and business manager. Later that year, in 2008, the company officially attempted to launch at SXSW, but failed to attract a single customer let alone any investors. Later that year, the company met with fifteen angel investors, but not a single one was interested. Now in debt due to funding the company out of pocket, the team decided to leverage the upcoming presidential campaign as another way to make money. Using their design background, the team designed collectible novelty presidential cereal boxes and sold them by hand on the streets of Denver during the 2008 Democratic National Convention. The stunt worked, and netted the team $30,000 to invest back into the company.

Y-Combinator to the Rescue

The one good thing that came out of SXSW however was a contact Chesky and Gebbia made with then CEO of Justin.TV, Michael Seibel. Seibel acted as the sole advisor to the team and encouraged them to apply to Y-Combinator. During the interview, Y-Combinator co-founder Paul Graham’s first question to the team was famously, ‘People are actually doing this? Why? What’s wrong with them?’ Needles to say, Graham was less than impressed. But, just before the team left the interview, against the advice of his partners, Gebbia gave a box of their cereal to Graham and quickly explained how the idea had allowed them to found the company. This was just the type of creativity and tenacity Graham liked to see. Later, Graham reportedly told Chesky as much when he said, “If you can convince people to pay forty dollars for a four-dollar box of cereal, you can probably convince people to sleep in other people’s airbeds.” The company was given $20,000 in seed funding from Y-Combinator and admission to the program in exchange for a 6% ownership stake in the company.

Find 100 People That Love You

Over the next three months, the team was mentored by Graham. Armed with his advice they continued to contact investors, and continued to get rejected. Reflecting in 2011 on why he rejected the company, Union Square Ventures investor Fred Wilson echoed the sentiment of nearly every investor the team approached at the time, “We couldn’t wrap our heads around air mattresses on the living room floors as the next hotel room.” However, the team was undeterred, and they held fast to Graham’s advice. In at 2013 interview with Charlie Rose, Chesky recalled some of the best advice Graham ever gave to them. According to Chesky, Graham told them, “Its better to have 100 people that love you than a million people that just sort of like you. Find 100 people that love you.” Chesky went on to say, ‘…almost all great movements in history, all great products start with a core base of people.’

Pressing Onward

Armed with this assurance, the team set out to stay the night with all their hosts using their site in New York City. Staying with these people and listening to their ideas caused the early hosts to feel a sense of identity and loyalty to the brand. It was this personal touch that helped the company’s early users remain steadfast. Soon thereafter in 2009, the company landed its first substantial round of funding when it accepted $600,000 in seed round funding from Sequoia Capital. It was this first real infusion in capital that allowed the company to takeoff.

Boom Time

The following year, with booming growth, Airbnb (as the name had by then been changed to) secured a Series A round of funding worth $7.2 million. The company had subsequently begun to allow hosts to rent out whole houses as well. The following year in 2011, the company landed $112 million in a Series B round of funding, and received a $1 billion valuation, making the startup a true unicorn.

Since then, the company has not looked back. Though having to navigate several lawsuits for property damage, and often having to pay high city regulator fees, the company has thrived. To date, the company has received $4.4 billion in funding, including a $1.5 billion Series E in 2015.

Currently, the site boasts over 4 million listings, and has been used to book rooms over 260 million stays. In 2017 alone, the company made a reported $96 million in profit off $2.6 billion in revenue. Some estimates say profits could reach as high as $3 billion by 2020. Whether or not the company will hit this staggering number is yet to be seen, but what is known is that the company has come quite a long way from the days of just trying to ‘make a few bucks’.